In 2010, a bevy of court decisions and actions by Congress impacted agricultural law.

In mid-February, Southwest Farm Press spoke with Roger McEowen, director of Iowa State University’s Center for Agricultural Law and Taxation (CALT), about what he sees as the most significant agriculture-related developments over the past year.

This is an important case on the issue of what constitutes crop insurance fraud. The case is “still somewhat alive,” says McEowen “so we may see further development in 2011.”

The case “is really a result of the federal-private kind of partnership that exists for the provision of crop insurance.”

This dates back to 1938, when Congress created the Federal Crop Insurance Act (FCIC), which established the Federal Crop Insurance Corporation within the USDA. That system was changed substantially in the 1996 farm bill when the Risk Management Agency was created and tasked with the job of administering the FCIC.

“What we have now is a system of private crop insurance companies that are reinsured by the FCIC. So, it’s a partnership between private industry and the federal government. Farmers go out and buy a policy from a private insurance company that pays them for covered losses. Then, the insurance company seeks reimbursement by the federal government through the FCIC.

“What happened in this case is an Iowa crop insurance agent submitted fraudulent crop insurance claims. He knew the farmers didn’t have an interest for which they were claiming insurance. He sent the (claims) in and was reimbursed by the federal government.”

The government found out and then prosecuted the agent under the Federal False Claims Act, which “has a lot of teeth.”

The agent prevailed at the trial court level “because the government couldn’t prove that he intended for the government to rely on false documents to reimburse his company out of the claims. The reason for that is what he did was make the claim through a private company that turned around and sought reimbursement.”

However, on appeal, “the court said in essence what (the agent) did was make a false claim … and the tax-paying public was harmed.

“Part of the case is remanded back to the trial court for further developments consistent with what the U.S. Court of Appeals for the Eighth Circuit said. So, a bit of it stays alive. But it’s important as to what constitutes submission of a false claim under the FCA.”

Any idea what penalties the agent is facing?

“Potentially, criminal penalties. I don’t know the specific ones because they’ve not gotten to a sentencing phase, yet.”

Depreciation

9. Expense method depreciation and leased property (Thomann v. Comr.)

There have been several “developments tax-wise in recent years that provide farmers with a way to achieve tremendous levels of depreciation on their returns – and, actually, if they don’t have enough income to fully utilize that depreciation, to show a loss on the return that can be carried forward, or back, to other tax years.

“But as this Iowa case points out, the depreciation provisions must be used very, very carefully.”

“With respect to expense method depreciation, in particular (now available up to $500,000 for 2010/2011), it’s an off-the-top allowance for a lot of farm assets used in the farming business. There are some limits – you must have farm income and have to be in the active conduct or a trade or business. That has implications if you’re leasing property under which assets you’ll claim expense method depreciation are involved.”

In this case, “a southeast Iowa farm couple owned and operated a 504-acre farm. They orally agreed to lease 124 acres – along with buildings, grain bins and equipment – to a hog farrow-to-finish business they also owned. They annually received $70,000 in cash rent for that.”

The couple claimed expense method depreciation on a lot of those assets under the lease. Those included pick-up trucks and the like.

“They leased the balance of the farmland to an unrelated party – again, under an oral lease. On that land, they were claiming expense method depreciation on such thing as drainage tile lines and fences.

“What happens in that situation is a special rule comes into play. If you’re claiming expense method depreciation on assets that are leased, you need to establish what the term of the lease is. So, you need a lease in writing. You also need to establish you’re materially participating; or, at least, not just passively collecting cash rent income under the lease.”

When the couple was unable to do that “the court knocked them out because it was just an oral lease and they couldn’t establish what the lease terms were. They were caught by the ‘non-corporate lessor rule.’

“But they would still have been nailed, I think, on the fact that they had cash leases. They weren’t deriving income from the active conduct of a trade, or business.

“It was big case and a big point was made. (The couple) had a lot of additional taxes to pay, plus penalties.”

Does a farmer need to take such business not just to a CPA but also a lawyer?

“A well-schooled CPA in farm taxation would have caught that and it wouldn’t have been a problem. A CPA knowledgeable in farm tax is able to set that up correctly.”

Medical reimbursement

8. Farms and medical reimbursement plans(Shellito v.Comr.)

An important case on Section 105 Plans came out of Kansas in 2010.

Such plans “are used primarily by sole proprietorships. We see them heavily used by sole proprietorship farming operations so you can employ the spouse in the business and provide a medical reimbursement plan for the spouse as a fringe benefit. So, it gets a … business deduction and the employer-spouse can be covered under the plan, as well as the rest of the family. Amounts reimbursed aren’t included in the employee-spouse’s income.

“Well, it must be set up correctly.

“A key thing about this case was (the farming family) did everything correctly. They employed the spouse, paid a wage, issued a W-2, withheld tax, kept a daily log book of the spouse’s activities, had a job description, all of that in writing and done properly.”

Still, the IRS “came after them on a couple of points. The IRS thought it important that the employee spouse was referred to as ‘housewife’ on the tax return and that she was paid a small wage in comparison to the amount of medical being reimbursed.

“Frankly, those two issues shouldn’t matter from a tax standpoint. But the tax courts agreed with the IRS and said they did. It went to the issue of the spouse not really being a bona fide employee in the court’s opinion. I think the court is wrong.”

The case is now on appeal.

GIPSA

7. GIPSA proposed rules

This is a result of what was contained in the 2008 farm bill rewrite.

“Under the 2008 farm bill, the USDA was tasked with the job of coming up with some new rules and regulations under the Packers and Stockyards Act (PSA). What the rules are designed to do in large part, is to clarify conduct that the PSA covers and allow for more effective and efficient enforcement by the Grain Inspection Packers and Stockyards Administration (GIPSA).

“The proposed rules – and they cover a lot of ground – that are primarily the most controversial, are the parts that would clarify conditions for industry compliance with the PSA and deal with the type of conduct and what has to be proven to establish the violation of anti-competitive covered by the act. The rules have been opened up for comments, comments have been submitted. They haven’t been finalized yet.

“A lot of trade organizations are against the rules. A lot of packers are also against the rules.

“Basically, Agriculture Secretary Vilsack tried, by rulemaking, to overturn (court) opinions on … what has to be proven to establish anti-competitive conduct under the PSA.

“That’s normally not the way we do things in the United States. We don’t try to overturn court opinions by an administrative regulatory body rewriting the rules. If we’re upset with court opinions, we get Congress to rewrite the statute. That’s at the core, the crux, with respect to the GIPSA rules.”

GM alfalfa

This was the first time the U.S. Supreme Court has ruled on a biotech case involving crops.

“This one came from the U.S. Circuit Court of Appeals for the 9th Circuit involving a temporary ban on genetically-modified alfalfa – Monsanto’s Roundup Ready alfalfa.

“The key issues were: whether the plaintiffs in the case – who were producers of organic alfalfa seed – were exempt from being required to show a likelihood of irreparable harm to get an injunction under the National Environmental Policy Act (NEPA); and whether the trial court could enter an injunction to remedy a NEPA violation without holding a hearing to resolve factual issues relevant to the scope of the injunction being sought.

“Bottom line was the U.S. Supreme Court reversed the (lower court) saying ‘you can’t just allege a violation of NEPA to get an exemption. You’ve got to go through a hearing. There has to be an evidentiary hearing, there has to be factual issues resolved, you have to show likelihood of irreparable harm.’

“The Supreme Court said the organic alfalfa seed growers and other conventional alfalfa producers simply couldn’t show irreparable harm. In fact, Justice Scalia mocked their legal counsel at oral arguments on the basis they could show irreparable harm coming from GM alfalfa…

“You have to be able to establish some type of harm to get an injunction. … What happened in this instance is they just didn’t like biotech and they argued it would wipe them out, those type of things. The trial court gave them an injunction.

“But the Supreme Court said ‘there’s no possible way you’ll suffer harm. We’re talking a minuscule amount of acreage. You haven’t shown any evidence of contamination problems. And if you have evidence of that, you’ll get an injunction.’ But they didn’t have anything in this case. They just didn’t want GMOs.

“Even Justice Ginsberg agreed with Scalia: ‘GMOs are here to stay. No matter what your complaints are, we’re not putting the genie back in the bottle. They basically laughed the plaintiffs’ lawyers out of the court room. We could see this would be a nine-to-zero opinion, hands down.”